Posts Tagged‘business model’

It’s no secret that I’m somewhat bearish when it comes to BitCoins. Fundamentally I think the idea is sound as cryptocurrencies have the potential to revolutionize the currency and exchange industry in the same way the Internet did for the communications. The current implementation though is plagued with non-technical problems mostly due to how easy it is to influence the price with transaction volumes that aren’t particularly large. Transaction volume has been increasing however and when this is coupled with conversion stability we will have the potential for cryptocurrencies to move out of the tech niche they’re in and become a fully fledged means for transferring wealth around the world.

Getting BitCoin to work then relies on making it a desirable currency to use in place of more traditional means. For the most part people have focused on using it either as an add-on to their existing business (we now accept BitCoins!) or creating a new business from scratch based solely around the idea of using BitCoins. If I’m honest the latter feels like people seeing BitCoins as an opener to their 4 Hour Work Week style businesses which, especially if their only distinction from the competition is accepting BitCoins, don’t do too well in today’s aggressive market place.

Apart from these types of businesses and the ancillary ones that surround every currency (exchanges, banks, gambling sites, etc.) I hadn’t really seen much innovation in the BitCoin space right up until I read an article about CoinLab.

CoinLab is in essence a library for game developers that allows users to generate in game currency in exchange for using their idle compute power to mine BitCoins on the network. The idea is that oing this will net the companies much more dollars per user than advertising or micro-transaction due to the seamless nature of it and the tendency for people to do almost anything to get something for free. The idea isn’t particularly new, there have been many products that have paid users to use their extra computing power, but the integration with BitCoins certainly is. The question then becomes how sustainable such a business model is and going off the fact that CoinLab just netted $500,000 from investors to prove the idea would lead you believe that there’s some merit to this idea.

The last few months have been rather good for BitCoin with the price being stable at around $5. Additionally the transaction volume has remained relatively steady showing that there’s base level demand for the currency that can be depended on. This works in CoinLab’s favour as a business model that was viable during the speculative bubble last year would not be long for this work, but at a stable and predictable rate of conversion you’re far more likely to hit on a sustainable business rather than a flash in the pan. What’s working against them however is the increasing difficulty built into the system which will make generating new coins harder over time.

This is somewhat counteracted by increasing user numbers which gives you more compute power and thus more chance at getting coins, but it’s the difference between the two that will be the deciding factor in how far the business can scale. The end game for such a company would eventually be a transaction processing house using their legions of computers as a big exchange network and taking transaction fees instead of mining but whether that’s sustainable or not is a question I don’t yet have the answer to. It will be very interesting to see where CoinLab goes with this and I hope they’re as open with their figures as the rest of the BitCoin industry has been thus far.

BitCoins are definitely a catalyst for new kinds of innovation in an industry that’s typically been glacially slow to integrate with new technologies. Startups like CoinLab are doing the hard yards to make cryptocurrencies viable for everyone else by increasing the base transaction volume so the price isn’t as susceptible to wild manipulation like it was in the past. I may still be bearish on the BitCoin idea but many of my initial complaints are starting to be overcome through innovative uses that I hadn’t once thought of. I’ll be watching developments in this area keenly and who knows, I might even dive into it myself.

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As the saying goes information wants to be free. In this day and age the limitations of traditional media no longer apply and the dissemination of information across the globe can be achieved for a cost that is continually approaching zero. We can unequivocally trace this back to the permeation of Internet access across all developed worlds as it torn down the physical barriers that used to be in place. For the information gatekeepers of the past the Internet has been the most disruptive technology that they’ve had to deal with and even today after nearly 2 decades of cheap, consumer level Internet access being available they’re still trying to erect their gates like they did with all its predecessors.

Unfortunately for them, it’s not really working.

However taking a closer look at the traditional media outlet business model there really aren’t too many differences between the new and old worlds. For starters both of them had their primary source of revenue as advertising with the cost of a newspaper or magazine usually only covering the costs of printing and publication. The key differences that break this model appear to be a combination of expectation from online news sources (no one expects to pay to see something on the web) in addition to a trend away from brand loyalty (you would rarely read all the newspapers in one day, but you can conceivably do that now with online feeds). There’s still a market for print media as many prefer that form to its online counterpart, much like how people still prefer books to eBooks (although even that is changing), but when it comes to online if you’re not doing it for free you’re likely to alienate those who were attracted to your online presence in the first place.

Of course this is all currently postulating on my part but it’s not without its roots in the real world. I’ve often held debates with my close friends and fellow bloggers that the subscription model for news is not well suited to the digital world and that any attempts to monetize in that fashion would be met with staunch resistance. Unfortunately for me the evidence was on their side since there were quite a few people (including themselves) who would pay for quality journalism in an online format so on an anecdote vs anecdote level they had the upper hand. Recently however there’s been more examples showing that my side of the fence might ultimately win out:

My sources say that not only is nobody subscribing to the website, but subscribers to the paper itself—who have free access to the site—are not going beyond the registration page. It’s an empty world.

The wider implications of this emptiness are only just starting to become clear. A Murdoch and Fleet Street veteran with whom I’ve been corresponding about the paywall reported to me on his recent conversation with an A-list entertainment publicist: “What was really interesting to me was that this person volunteered a blinding realization. ‘Why would I get any of my clients to talk to the Times or the Sunday Timesif they are behind a paywall? Who can see it? I can’t even share a link and they aren’t on search. It’s as though their writers don’t exist anymore.’”

Or to be more scientific about it The Times lost over 90% of its online readership after putting up a paywall:

These figures can then be used to model how this may impact on the number of users hitting the new Times site. Based on the last available ABCe data for Times Online readership (from February 2010), which showed that it had 1.2 million daily unique users, and Hitwise’s figures showing it had 15% of UK online newspaper traffic, that means a total of 332,800 daily users trying to visit the Times site.

If none of the people visiting the site have already registered, the one-on-four dropout rate means that traffic actually going from the registration site to the Times site is just 84,800, or 1.06% of total UK newspaper traffic – a 93% fall compared with May

The evidence thus far suggests that taking a free service and making it pay only is a sure fire way to lose your online readership. Any Internet startupwill tell you that getting people to pay for your product up front will make it an uphill battle to drive adoption and that’s why many of them have chosen to adopt a Freemium model instead. It makes quite a lot of sense when you consider the cost of changing news providers online is essentially zero and the value derived is almost identical. So why are some media outlets attempting to shoe horn their old business models into the new world? From my point of view there seems to be a few reasons why.

The first is that despite trashing their online presence by limiting it to pay only many of the online media outlets will still be able to generate a decent amount of revenue from doing so. Since a media site can arguably done quite cheaply it doesn’t take a whole lot of paying users to cover the costs and make a healthy bit of profit on top. Additionally if you provide a service that has free alternatives that just aren’t up to scratch, like say Wall Street Journal and Financial times with their stock information, you’re likely to attract quite a following especially if your users perceive that they’re getting a good deal.

For many of the larger media outlets it’s also about trying to regain some of the control that they lost when the world started looking elsewhere for their information fix. Erecting a paywall takes the medium of the Internet and attempts to make it behave much like a traditional media source with the gate keeper firmly in place. Whilst I won’t go so far as to suggest that blogs/Twitter/YouTube/Citizen Media will ever replace traditional journalism (although I’ll argue they’re a good enough alternative for many) reestablishing themselves as gate keepers in the new information conduit ensures that their traditional business models at least have some relevance in the new media marketplace. That would be rather reassuring for any media outlet that’s struggling to come to terms with the digital revolution.

The digital world has been a revolution in so many respects that its hard to find parallels in history books. Whilst there’s been many changes of similar magnitude none have been this disruptiveon so many levels over such a short period of time. It is then logical that traditional businesses, not just media outlets, would struggle to comes to terms with it. With my generation beginning to take over these traditional media streams I’m sure the trend of embracing the new world will continue and I’m sure that in a couple decades there will be another disruptive technology changes the game again.

And then someone else will write a post like this about how my generation can’t get it right in their new world. Ad infinitum.

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I’ve blogged a lot in the past about piracy and its various implications, mostly because it makes for good blog fodder. It’s one of those issues that you can wax on for hours since the rules are pretty well defined (I.E. it’s illegal) but the social norm is completely the opposite. A great conversation to have with someone, who has downloaded files from such nefarious means, is their justification for doing so. It usually comes down to “everyone does it” or “I couldn’t be bothered paying for X for Y reason” and watching them squirm under their way out of the question. The main reason I see is that the pirates providing the services are doing a damn good job of it and in fact, it seems that even when a court topples a pirating giant the service was still up and running with higher availability. I’d like to see any business claim they could do that:

The temporary closure of the Pirate Bay had the unforeseen side effect of forcing torrent sharers underground and causing a 300% increase in sites providing access to copyright files, according to McAfee.

In August, Swedish courts ordered that all traffic be blocked from Pirate Bay, but any hope of scotching the piracy of music, software and films over the web vanished as copycat sites sprung up and the content took on a life of its own.

“This was a true ‘cloud computing’ effort,” the company said in its Threats Report for the third quarter. “The masses stepped up to make this database of torrents available to others.”

This got me thinking, the pirate business model is obviously working for a lot of people so what’s stopping the rights holders from beating them at their own game? I mean the investment in the technology would be minimal since most of the bandwidth is handled by the clients, they more than likely have all of their material available in a digital form so it seems like a pretty low cost option. The only problem we have is the monetization of the service, which is currently done using online advertising. I’m not going to pretend a service like this would be as profitable as some of their current endeavours but if they’re serious about taking these guys down there’s only one way to do it: beat them at their own game.

Suppose there was a service like the Pirate Bay but was sanctioned by the rights holders. In exchange for using their client and their website you’re guaranteed all content on their is yours to use as you see fit. I make the distinction that you use their client as it gives them another revenue opportunity. They could then offer a premium service where you could get access to content before the wider audience for a certain fee per month. This gets your material out to the wider world whilst still giving you ample revenue generation streams. Plus you still have the live performances that are the real cash cows.

It’s not your traditional business model but that’s why the pirates are succeeding in the digital world and the rights holders are floundering. Most of them seem caught up in the idea that they need some way of protecting their property no matter what the medium it is on. Even though DRM in the past has proved to be useless and only a burden on the legitimate consumer companies still cling to it in the hopes that it will somehow keep their sales up. What they need to do is to rethink their strategy for the demographics that are consuming their product regardless of its origin and target them with a service like this. Us Gen-Ys are getting older and more cashed up so the market for this kind of product is definitely growing but the value-add is currently missing from the legitimate providers, so the pirates are still winning.

Each new technological revolution requires companies to rethink their strategies to work in the new world. It’s no secret that rights holders have typically been quite adverse to any new revolution which has the potential to impact their current business model and that’s with good reason, their livelyhood is at stake. We could well be heading into an era where large corporations are replaced by many smaller companies which are more capable of responding to the fast pace technologically driven world we live in today, as the article up the top shows. Who knows maybe these pirates will one day be considered the pioneers of the new digital revolution for media and held up as heroes rather than criminals.